January/February 2011

NewStar Business Credit: A CORE Acquisition Creates the ‘Newest Star’ in the ABL Firmament

Late last year, NewStar Financial announced it intended to add asset-based lending to its product offerings by acquiring CORE Business Credit, causing something of a positive stir in the commercial finance community. ABF Journal asked NewStar’s chairman and CEO Tim Conway and CORE’s Michael Haddad to discuss the rationale behind the acquisition.

It has been five years since ABF Journal spent time with Tim Conway, the chairman and CEO of Boston-based NewStar Financial to find out about the relatively new specialty finance company that had caught the attention of the commercial finance community. At that time, the company had been around some 18 months and had already booked $800 million in new business. At the time, Conway said of the new venture and its team of seasoned bankers, “We’re just getting started … with our experience, our financial strength and our commitment to customer service, we’re very optimistic about what the future holds.” In 2005, he also reported that the company had not ruled out the possibility of going public in time.

In the five years that ensued, the company did indeed go public and raised additional capital in a subsequent private equity offering. Conway notes, “We’ve done five CLOs, and raised very attractive liabilities in the market as well as arranged and renewed a variety of bank term financings and warehouse lines. Today, we’re just a little under $2 billion on the balance sheet and around $2.3 billion total assets under management.”

When one considers the liquidity constraints brought about by the financial meltdown, NewStar has found itself in an enviable position. “Even with extreme volatility in the markets, we’ve been able to raise capital through the whole crisis. At the end of 2009, we did the first securitization that had been done in over two years,” he explains. “That’s a good demonstration of our continued access to capital.”

Conway continues, “And we’ve stayed active in the market the entire time … even when times got tough. Every quarter, we were in front of our customers and we continued to make loans although at a slower pace. We also protected our book value per share, while other financial companies experienced significant declines in book value from a combination of losses and dilutive capital raises. We certainly increased reserves and charged- off some loans during this cycle, but we came through it with a really good track record on credit performance. I’d say we spent 2009 playing defense by shoring up the liability side of the balance sheet and increasing reserves while we worked on credit issues.”

And as tough as it was, Conway admits, “It was good in a way to have gone through these recent times, not that I’d want to do it again … but it was good in that it separated out those who had more capital and a solid plan from those who didn’t. And because we stuck to our knitting, we’re one of those companies that’s still standing and that’s a good place to be. Now we’ve shifted back to playing offense in 2010, increasing our origination volumes and thinking strategically again about how to build the business.”

It was this strategic thinking that lead to the acquisition of CORE Business Credit. From a timing perspective, venturing into the ABL business at the onset of an economic recovery made sense to Conway and the NewStar team. “In some ways,” he explains, “the asset-based lending business is counter-cyclical to our cash-flow business.  Lending activity increases in down cycles and through the early stages of economic recovery . At NewStar, we were looking to broaden our offerings and build our product set in areas that are synergistic to what we do for our customers that leverages our credit expertise.”

Along comes CORE Business Credit with Michael Haddad at its helm. A seasoned veteran of the industry, Haddad has earned a strong reputation for creating new ABL shops in more than one institution such as Fidelity Funding, Guaranty Bank, Marquette Financial and American Capital, the principal investor in CORE Business Credit. “We recognized very quickly that CORE was a perfect fit for us, primarily because of the proven track record and expertise Michael and his team could bring to NewStar,” Conway recalls. In addition to the team’s combined talents, NewStar saw a match with CORE’s approach toward credit, with the customers both companies court and the size of the deals CORE executes. “And,” Conway concludes, “it was a small enough deal … they’ve got a very good platform in place and we think we can build it — but it was small enough that we could diligence it very well.”

To top it off, he acknowledges that Haddad had arranged attractive funding that NewStar could readily assume. In short, there were synergies on many fronts: the size, the team and the product coupled with cross-sell opportunities with NewStar’s existing customers.

From where Haddad sits, the previous prospect and now reality of having a new parent in NewStar Financial is exciting. “It is exciting for a number of reasons,” Haddad affirms. “This gives us capital to grow — it’s not as though we didn’t have capital before, we did. But now we’ve got capital that can really fulfill on the growth plans we envision.

“Another reason that makes this exciting is we now have an enhanced ability to go out into the capital markets and the reason for that is NewStar’s reputation. And then there’s the fact that  we have a currency now — something we haven’t had since our days at Guaranty — and that comes in the form of NewStar’s stock and cash. That’s going to be a distinct advantage for us.”

Haddad too acknowledges CORE’s and NewStar’s common focus on the middle market. “We’re middle-market guys … a different asset class but we’re really playing in the same space. We’re just looking at it a different way and that is exciting for us too. Culturally there’s a fit as well … we both like doing deals. And lastly, NewStar brings great systems — they have a great platform and we intend to take full advantage of a lot of what they have in place. We’re more than excited … we’re thrilled.”

Equally thrilling for Haddad is the expanded footprint and the deep relationships NewStar brings to the acquisition. With NewStar’s existing offices in Boston; Darien, CT and  Chicago along with CORE’s Atlanta, Dallas, Houston and Los Angeles locations, Haddad is confident that the combination, geographically has the market covered sufficiently to service its deep relationships.

With regard to the blending of cultures, Conway explains, “Anytime you do something like this, you’ve got to make sure it’s a good fit and I also believe you’ve got to get the right balance of keeping and not changing what they do well. CORE’s track record on credit has been fantastic and the team has long experience in the ABL business. We’ll let Michael run his business and not change things materially. At the same time, we’re all looking at risk … we’re measuring risk and advantaging risk from a corporate perspective. You have to dovetail those things together. So far, we’ve been able to do that very well. We’ve been sitting in on their credit meetings and management meetings and vice versa. They look at credit in a similar way as we do. My sense of it so far is it’s a very good fit.”

Haddad adds, “For us, the real opportunity with the NewStar marriage is where we’ll play in the ABL marketplace … in the $5 million to $20 million world. A lot of the lenders have gone up-market and the big guys want the big deals. And then there’s a whole host of lenders that are $5 million and below. So we’ll be playing really hard in that space in between. Now, when we go into a deal as NewStar Business Credit and they ask, ‘Who are you?’ … we’ve got a quick story to tell. It goes something like; we’re NewStar … go to our website or go to our stock symbol (NEWS) as we are public.’ I don’t have to explain who our private equity group is or how much they have or don’t have. It’s an unclouded story to tell.”

In terms of what the future holds, Conway explains that a mid-ticket equipment finance business is in NewStar’s not-so-far-off future. He says, “That business fits nicely with our other businesses and our platform becomes one that’s broad based across the country with lots of calling officers to meet our customers’ needs.”

For both Conway and Haddad, the convergence of CORE Business Credit and NewStar Financial was the right fit that came at the right time and portends a bright future going forward.